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One-fourth of Colorado banks ailing

Colorado banks are under greater financial stress and have a thinner cushion to absorb bad loans than banks in most other states, according to two national surveys on bank health.

About one out of four Colorado banks, 25.6 percent, met the definition of a troubled or problematic institution at the end of 2010, according to BauerFinancial, a Florida firm that rates banks. That is up from about one out of five at the end of 2009 and double the U.S. average of 12.8 percent.

Ten Colorado banks out of 169 had the lowest possible rating, zero, including four that slipped to that level in the fourth quarter. The BauerFinancial system rates banks on a scale of zero to five stars.

Colorado also has suffered the second- and third-largest bank failures in the country this year, according to the Federal Deposit Insurance Corp.

In January, regulators seized United Western Bank, a $2.05 billion thrift, and sold it to First-Citizens Bank & Trust of Raleigh, N.C. A week later, also in January, they seized FirsTier Bank of Louisville, a $781.5 million bank, and liquidated it after failing to find a buyer.

Another survey from BestCashCow.com, a consumer website on banks and credit unions, found that Colorado's community banks had the fourth-thinnest cushion to absorb losses from bad loans.

Only Georgia, Florida and South Carolina had weaker banks, said Sol Nasisi, chief economist for the website.

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Nasisi compared capital and reserves for loan losses with the amount of delinquent loans and repossessed assets. He looked at banks with $1 billion or less in assets in every state at the end of the year.

That measure, known as the Texas ratio, was a good predictor of failures during the S&L crisis.

A ratio above 100 indicates that loan losses could wipe out a bank's capital, leaving it insolvent. Colorado's state average came in at 50. Georgia had the highest ratio at 79.

Faster population growth and heavy real estate lending seem to be common themes among the states with troubled banking sectors, Nasisi said.

"Colorado tends to have a high percentage of construction loans on its books, compared to the average," Nasisi said.

But lax regulation also plays a part. States that chartered multiple startups and let them grow quickly have some of the weakest banks, he said.

Although the downturn hit Nevada much harder and its banks carry a higher percentage of bad loans than Colorado banks, Nevada banks also kept more capital in reserves, Nasisi said.

Too cautious?

Don Childears, chief executive of the Colorado Bankers Association, said he views the impact of regulation differently.

Regulators in some states have been stricter about forcing banks to recognize nonperforming loans, he said.

"We constantly hear stories about well-performing loans where the customer has never missed a payment or been late but where regulators in their superabundance of caution don't like them and reclassify them," he said.

That isn't necessarily contradictory. Regulators too lax in the boom days can become extra severe when a bust hits, said Larry Martin, a Denver-based banking consultant.

Martin also notes that when new management steps into a troubled bank, it is more aggressive about writing down bad loans than the previous managers who made them.

That was the case last fall at Colorado Capital Bank of Castle Rock, which slipped from two stars in the third quarter to zero in the second.

Colorado Capital started in 2003, when investors purchased a majority interest in BankWest and grew it from from two locations and $50 million in assets to seven branches and $920.8 million in assets.

Many failures involve young banks that grew rapidly by drawing in deposits from outside their core customer base and lending too loosely, Martin said.

"Where were the regulators during that type of rapid growth?" he asks. "The slow and steady model is the one that survives in the long term."

Other banks dropping to a zero rating during the quarter included Pueblo Bank & Trust, Champion Bank in Parker and Premier Bank in Denver.

A low star rating can indicate a bank that is getting its house in order, a necessary step to returning to health, Martin said.

The problem is that it isn't always certain which banks will survive the process and which have reached the point of no return.

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